You think the present Congress can’t get anything done? It took more than a hundred years for Congress to pass the first permanent bankruptcy law.

Lots of people know that bankruptcy was important enough to our founders to be included in the U.S. Constitution. But that’s just the very beginning of the story:

  • The Bankruptcy Clause, giving power to Congress to “pass uniform laws on the subject of bankruptcies” was added with very little debate, late in the Constitutional Convention’s proceedings. There had been no provision for nationwide bankruptcy in the earlier doomed-to-fail Articles of Confederation.
  • The only vote against the Bankruptcy Clause was by Connecticut, which already had a detailed bankruptcy law and wanted to keep it instead of ceding that authority to the federal government. One of their delegates also was concerned that a federal bankruptcy law would include the death penalty for debtors for certain bankruptcy offenses, as English law still did at the time.
  • But just because Congress was empowered by the Constitution to pass bankruptcy legislation, for nearly half our history it did so in an extraordinary irregular and knee-jerk fashion. Three different times during the 19th century a federal bankruptcy law was passed, each time immediately after a devastating financial “Panic,” only to be repealed after just a few years. During the majority of the time that no federal law was in effect, the states developed a patchwork of bankruptcy and debtor-creditor laws, which became less and less effective as commerce became ever more interstate.
  • Then finally Congress passed the Bankruptcy Act of 1898, which lasted 80 years.  Although primarily inspired by commercial creditor interests, it included the following debtor-friendly provisions: most debts became dischargeable, creditors no longer had to be paid a certain minimum percentage of their debts, and no longer could withhold their consent to the debtor’s discharge.
  • The Bankruptcy Act of 1898 survived many attempts at repeal, in contrast to its predecessors. It was amended numerous times, in a major way in 1938 in response to the Great Depression. That 1938 amendment added the “chapter XIII “wage earners’ plans, the predecessor to the current Chapter 13s.
  • The 1978 Bankruptcy Reform Act, which brought into existence the Bankruptcy Code, was the result of a decade of study and debate. It is the only major enactment of bankruptcy law in U.S. history which was not enacted in reaction to a severe economic downturn. It has been tweaked every few years since then, most significantly in 2005.

It will be just a little bit easier or a little bit harder to qualify to file a Chapter 7 “straight bankruptcy” as of November 1, 2011. Whether it’ll be easier or harder for you depends on the state where you reside and on your family size.

What changes on November 1? The bankruptcy system looks to the U.S. Census to calculate each state’s median income, as applicable to each size of family. Median income is the amount at which half of the state’s families have incomes higher and half have lower. If your income is below your state’s median income for your size of family, then in almost all situations you can file a Chapter 7 case. But if your income is above that median income amount and you still want to file a Chapter 7 case, then you have to fill out a long and rather complicated form about your allowed expenses to determine whether or not filing a Chapter 7 case would be “abusive.” So if you want to file a Chapter 7 bankruptcy, it’s a lot easier if you’re below the median.

On November 1, new median income amounts become applicable. Some people were predicting these amounts would be lower because of the faltering economy. But in many states the income figures went up instead of down. For example, among single-person families, 31 of the states’ median incomes went up and only 19 went down. Remember, if the median income goes up, that makes it a little more likely that your income will fall below that median, and you’ll have smoother sailing qualifying for Chapter 7.

So, if your income is close to the applicable median amount, and the median is increasing for your family size in your state on November 1, then you have a better chance at falling under the median if you file on or after that date. But if the applicable median is decreasing, then you have a better chance of falling under the median if you file your bankruptcy before then, by no later than October 31.

I’m about to give you the two lists of median income amounts—the one applicable through October 1, and the other starting November 1. But before you start comparing those annual income amounts to your income, please understand that the meaning of “income” in this context is quite different than conventional meanings of that word. “Income” here is calculated using a six-calendar-month look back period that is doubled and then divided by 12 for an average monthly income. It includes all sources of income from all family members other than social security, not just taxable income.

Because of this and many other sorts of complications, yon truly need to consult with a bankruptcy attorney about whether this November 1 median income changes matter to you, and whether you should try to file before then or instead after. But to get you started, here are the two median income lists: the one to use until October 31, 2011, and the other to use after that.

The amount of property you get to keep in a bankruptcy is the result of a 200-year-old Constitutional battle of states’ right versus federal power.  The Bankruptcy Code provides for a uniform federal set of property exemptions, but if you live in one of 35 states you cannot use those exemptions. Instead you’re stuck with your state’s separate set of exemptions. Your state has chosen to “opt-out” of the federal exemptions.

If bankruptcy law is federal law, how come states get to do that? Here’s the back story to this legal oddity.

You’ve heard that the idea of bankruptcy was important enough to our country’s founders that they put it into the U.S. Constitution. It’s right near the top, in Article 1. The enumerated powers of Congress include “to establish… uniform Laws on the subject of Bankruptcies throughout the United States.”

But did you know that we did not have a federal bankruptcy law for most of the century after the signing of the Constitution? And that the reason we didn’t is in large part because of the contentious issue of property exemptions?

How so? Throughout the 1800s—way before and long after the Civil War–the country waged a political and economic war between Northeastern bankers and Western and Southern farmers and small merchants. Because of reoccurring devastating financial “panics” throughout the century, the farmers and merchants had good reason to worry about losing their homes and farms to out-of-state creditors. Largely in response to this, the first law exempting property from the collection of debt was adopted in 1839 in the Republic of Texas, and spread quickly through the South and the Midwest during the 1840s and 1850s.

Also in reaction to those severe “panics,” three different federal bankruptcy laws were passed and signed into law during that century. But each resulted from a delicate regional compromise to address the immediate economic turmoil, and all were repealed as soon as the economy improved and the political winds shifted. When the first long-standing law finally passed in 1898, it could only get enough votes by allowing debtors filing bankruptcy to use their state law exemptions.

That 1898 bankruptcy law lasted 80 years. When it was repealed and replaced with the current Bankruptcy Code in the late 1970s, some in Congress wanted to continue using state exemptions, while others wanted to impose a mandatory uniform federal system.  The compromise: as I said at the beginning, you can choose between a federal set of exemptions or the local state exemptions, UNLESS you are a resident of one of the 35 states which has “opted out” of the federal exemptions, requiring you to use that state’s exemptions.

Sounds like a big win for states’ rights. States get to have their way whether they want their residents to have exemptions more generous or more narrow than the federal ones, and whether those residents have the choice between the two exemption systems or must use the state one. This system can help you or hurt you depending where you live and what you own. For better or for worse, it sure is a big exception to the Constitution’s pronouncement about “uniform laws on the subject of Bankruptcies.”